Apple's iPhone 7 Cycle Is Looking Very Familiar

CLSA’s Avi Silver believes the sentiment toward Apple Inc. (NASDAQ: AAPL)'s iPhone 7 cycle is “strikingly similar” to the transition period between the iPhone 5 and iPhone 5S.

Silver maintained a Buy rating on the company, with a $115 price target.

Reminiscent Of iPhone 5S

“The iPhone5 was a botched cycle and the very broad expectation at this time 3 years ago was that a 5S with the same form factor of the iPhone5,” the analyst mentioned, while adding, “We are now towards the end of Apple’s botched 6S cycle and many investors are declaring the iPhone7 DOA.”

Related Link: Concerns About iPhone Production Cuts Likely Already Priced Into Suppliers

Silver pointed out the similarities as easy comps, robust upgrade base and low expectations, which were also the reasons why the iPhone 5S led to a positive surprise.

Silver believes the failure of the iPhone 5 was in part because “it had the wrong form factor at a time when the Galaxy S3 had just the right form factor,” although the analyst noted “it goes a bit deeper than that.”

Driving iPhone Sales

Silver explained that Apple’s smartphone sales are driven in two ways, either through upgrades or through sales to new users.

“The upgrader is often on a two-year cycle, while the new user can come from one of two places: either a new smartphone adopter or a switcher from another iPhone platform,” the analyst stated.

When the company laps a robust two-year cycle, the sales of upgrades tend to be strong. However, problems occur when the product is either not on such a robust cycle or the company is offering “the wrong product to attract new users from other platforms.”

The latter is what occurred during the iPhone 5 cycle, and at least to some extent with the iPhone 6S.